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Banks should be bribed to boost lending to small businesses, says King

Banks should be given financial incentives to boost lending to cash-strapped small businesses, according to Bank of England (BoE) governor Sir Mervyn King.

Speaking to MPs within the Treasury Select Committee on the BoE’s decision to pump £75 billion into the economy with a further round of quantitative easing, King said the Government needed to address the lack of lending to smaller firms.

“Measures that are directed particularly on finding incentives for banks to lend specifically to SMEs are something which is appropriate for the Government to do, and they have instruments to do it, which we don’t,” King said.

He added: “Fiscal incentives can persuade banks to lend to SMEs.”

But the Federation of Small Businesses (FSB) said that increased competition in the banking sector – not financial incentives – was needed in order to stimulate lending.

“The banks say there’s no demand for borrowing in the current climate but we know that a third of small firms are still being turned away for finance,” said FSB spokesperson Sara Lee.

“With the Big Four currently holding around 85 per cent of the market share in small-business banking, this has to be shaken up if we are going to see a banking sector that is more responsive to the needs of small firms,” she added. “Giving banks financial rewards for lending does not tackle the underlying problem of lack of competition.”

In February, the Government set out the Project Merlin agreement with the biggest high- street banks in an attempt to increase lending to small businesses, but the banks collectively failed to meet lending targets, according to BoE figures released in May.

Statistical director David Dooks at the British Bankers Association said the weak economic outlook meant fewer firms were looking to borrow money at the moment.

“Firms are continuing to build up cash reserves where possible, while concerns about the economy may be putting some investment intentions on hold,” he said.

Earlier this month, Chancellor George Osborne announced a plan to channel loans to small and medium-sized companies through credit easing but the Treasury has yet to provide full details of how the scheme would work.